Syngenta: Technology to boost world food supplies

12:37 PM MDT | August 23, 2013 | Natasha Alperowicz in Basel

Syngenta CEO Mike Mack.

Syngenta (Basel), the leading global producer of crop protection chemicals and the third-largest seeds player, has ambitious goals. The company, in 2011, combined the commercial operations of these two businesses to serve farmers with an integrated, crop-by-crop offering. The new business model, which aims to help growers manage volatility and complexity while increasing crop yields, should help Syngenta to almost double annual sales for eight strategic crops by 2020.

Syngenta has upgraded its 2020 sales targets to $25 billion since the introduction of the combined strategy. “This represents a significantly higher long-term growth rate than we could have expected with our former strategy,” says Mike Mack, Syngenta’s CEO.

The company, formed in 2000 by the merger of the agchem operations of Novartis and the former Zeneca, has one of the most diverse portfolios in the crop protection industry, combining chemistry, biology, seed care, and transgenics. The company is involved in the discovery, development, manufacture, and marketing of products designed to improve crop yields and food quality, as well as products for the lawn and garden business that provide professional growers and consumers with flowers, turf, and landscape products.

Syngenta reported 2012 sales of $13.5 billion in crop protection and seeds, of which 76% came from crop protection and 24% from seeds. Lawn and garden sales were $757 million. Ebitda was $3.15 billion, translating to an Ebitda margin of 22.2%, and net income was $2.1 billion. The company’s 2012 sales of selective and nonselective herbicides each rose 12%, to $2.94 billion and $1.25 billion, respectively. Insecticide sales were up 3%, to $1.84 billion, fungicide revenue advanced 2%, to $3.04 billion, and sales of seed-care products were up 9%, to $1.11 billion. Seeds were the fastest-growing category, with sales almost 14% higher at $3.24 billion.

Syngenta competes principally with BASF, Bayer CropScience, Dow AgroSciences, DuPont, and Monsanto. These six companies account for about 65% of the worldwide market for crop protection and seed products. The crop protection market expanded by 8% in 2012, to $47 billion, and the seeds market grew 9%, to almost $38 billion, according to analysts. Syngenta’s worldwide market share is approximately 20% in crop protection and 9% in seeds.

Syngenta is the world’s leading producer of fungicides and selective herbicides, the number-two player in insecticides after Bayer, and number two in nonselective herbicides, behind Monsanto. In seeds, Syngenta is the third-biggest player, behind Monsanto and Pioneer, a DuPont subsidiary. Major seeds companies outside the top six are Vilmorin (La Ménitré, France), KWS (Einbeck, Germany), Ball (West Chicago, IL), Sakata (Yokohama, Japan), and Takii (Kyoto, Japan).

Syngenta is one of only two major agchem producers focused solely on agriculture; most of its peers also produce mainstream chemicals, and Bayer also makes pharmaceuticals. Syngenta is a leading producer in all of the major crop protection categories as well as in seeds, so it can offer farmers a wide range of integrated solutions.

Agchem producers such as Syngenta and their counterparts in the fertilizer industry play a vital role in meeting the needs of the so-called mother of all global megatrends: feeding a growing world population by producing more food from the same acreage. The United Nations forecasts that the world’s population will grow to 9 billion in 2050 from about 7 billion at the end of 2011. Food production, worth almost $5 trillion/year, is already the world’s largest industry and will need to double in size by 2050, Mack says.

He says that major crop yields are currently rising too slowly. Four crops—soybeans, wheat, rice, and corn—account for almost two-thirds of global calorie consumption. If their yields continue to grow at historical rates of only 1.3%/year, there will be significant shortfalls in world food supplies, Mack says. The average rate of yield growth will almost have to double from today’s rate if 2050 food demand is to be met without cultivating more land. He argues that this growing output gap underlines the need for continued innovation in agricultural technology.

Pisk: Rising grain demand in developing countries.

Atkin: Africa offers greatest growth potential.

Ramsay: Major hike in seed production.

China and India will account for 40% of total food demand by 2025, says Davor Pisk, Syngenta COO. By 2050, demand for grain will increase by 50%—comprising 25% growth in human food and 75% growth in animal feed, due to rising meat consumption—and more than 80% of grain demand will be in developing countries.

Latin American sales are forecast to increase at a compound annual growth rate (CAGR) of 10% through 2020 compared with 5% in North America. Sales in Europe, Africa, and the Mideast (EAME) and in Asia/Pacific should grow at 5–10%. Latin America is expected to become Syngenta’s largest market by 2020. It is currently about equal in size to EAME and North America. Asia/Pacific is the smallest region in sales. Expansion in Latin America will be driven by new soybean chemistry and market share gains in seeds and sugarcane. Growth in sugarcane will be partly due to Syngenta’s Plene system, which combines chemistry, plant genetics, and mechanical technology to provide an integrated cane-planting solution. Plene is currently being commercialized in Brazil.

Syngenta’s North American strategy will focus on water optimization, new traits, and managing the increasing resistance by certain pests, such as corn rootworm and broomrape, to commonly used crop protection products, including glyphosate. The company’s Enogen corn, launched in 2011, will help Syngenta achieve the first objective. Enogen, which incorporates an alpha-amylase trait, is designed to boost yields for the bioethanol industry. The product, the first genetically modified (GM) seed specifically aimed at the ethanol industry, is used in 8 of the 180 fermentation ethanol plants in the United States. Enogen achieves big savings in water and energy use and significantly lower carbon dioxide emissions, Syngenta says.

Enogen’s attractive economics will help boost Syngenta’s share of the US corn market both directly as well as by encouraging corn growers to look at the whole of the company’s integrated offer, Syngenta says. About 34% of US-grown corn is used in ethanol production.

Syngenta’s share of the US corn market was broadly flat in mid-2013 compared with the previous year, depending on acreage, the company says. “While the severe US drought reduced the availability of top traited hybrids, we remain confident in our key technologies, such as Enogen and Duracade,” the company says. Duracade is a next-generation trait for controling corn rootworm.

In EAME, Syngenta will focus on cereals protocols and hybridization, leadership in Eastern Europe, and new opportunities in Africa, where the company has pledged to invest $500 million over the next 10 years to increase annual sales to $1 billion by 2022. Current sales in Africa are about $350 million/year. Asia/Pacific sales are on course to grow significantly through an extended rice franchise as well as corn germplasm, traits and hybrids, and integrated pest management in vegetables, although the region’s sales will continue to be the smallest.

Syngenta expects to double sales to CIS countries, to $1.5 billion, by 2020, led by growth in DFCs, especially sunflowers and, to a lesser extent, other oil seeds, as well as sugar beet. The company is the largest supplier of crop protection chemicals and seeds to CIS, with a 22% overall market share in 2012, principally in agchems, but with a commanding 31% share in DFC seeds. Plans include an $85-million investment to build a hybrid seed and crop protection facility in Russia. Syngenta registered a CAGR of 23% in CIS during the decade before 2012.

Syngenta’s overall sales have increased at a CAGR of 9% in the last five years. Growth was mainly organic, but, in 2012, the company spent $654 million on acquisitions, including Devgen (Ghent, Belgium), the largest M&A deal in the company’s history. Devgen is a world leader in hybrid rice and RNA interference technology. The rice seed market is underdeveloped and has significant growth potential, Syngenta says. Devgen’s established presence in key Asian markets and its world-leading product pipeline are key to exploiting this potential, the company adds. Syngenta, also in 2012, acquired Pasteuria Biosciences (Alachua, FL)—a deal that incorporated biologicals into Syngenta’s crop protection offer—and bought Sunfield Seeds (Chico, CA), a provider of sunflower seeds production and processing services.

Syngenta is in the process of acquiring MRI Seed Zambia and MRI Agro (MRI; Lusaka, Zambia), a leading developer, producer, and distributor of white corn seed. The transaction should close by the end of this year. White corn seed has high growth potential and is critical to Africa’s future food security, Syngenta says. “This acquisition reflects our commitment to sustainable development in Africa, which is clearly emerging as the continent with the greatest growth potential,” says John Atkin, Syngenta COO. “Smallholders and larger farmers in Zambia will quickly benefit from the combined innovation of MRI and Syngenta in seeds, seed care, and crop protection.” The deal will also provide the foundation for integrated crop solutions that respond to the needs of African farmers, he says.

MRI’s corn germplasm is among Africa’s most comprehensive and diverse, incorporating temperate, tropical, and subtropical material. The portfolio will be developed to support expansion in high-growth East African markets and could be leveraged worldwide through Syngenta’s breeding programs. “The MRI acquisition is extremely important” in achieving Syngenta’s targets in Africa, Atkin says.

Sugarcane: Plene will revolutionize industry.

The company also plans to introduce technologies from other regions into Africa. “Much more important will be our crop protection technology,” Atkin says. “This means registering and showing African farmers how to use the technology. In Tanzania, in cooperation with Yara, we have shown that it is possible to double yields of rice and corn very quickly. That is good agronomy, using the right product at the right time.” Syngenta expects to help more than 5 million African farmers achieve productivity gains of 50% in the next 10 years.

Syngenta, meanwhile, has been restructuring its lawn and garden business. The company divested its Fafard peat growing media business and Syngenta Horticultural Services, a US flower distribution and brokerage business, in 2012. At the same time, it acquired the DuPont Professional Products insecticides business. All of these deals form part of Syngenta’s strategy to focus on “elite genetics and high-value chemicals” in the lawn and garden business, the company says. The lawn and garden business targets an Ebitda margin of 20% by 2015. Its pro forma Ebitda margin last year, adjusted for divestments and acquisitions, was 16.5%. The business’s sales target is $1.1 billion in 2020.

Syngenta is a partner in many collaboration agreements. It signed exclusive worldwide agreements in 2012 with Novozymes to commercialize Novozymes’ Taegro and JumpStart technologies. Taegro, a fermented biological fungicide based on a naturally occurring bacterium, offers broad-spectrum disease control at low application rates. JumpStart, a seed-applied biological, increases phosphate solubility in the soil and will be marketed in combination with Syngenta’s seed-care portfolio.

Syngenta may also be contemplating a move into enzymes and/or nutrition and food ingredients. The company, in its 20-F filing, says that potential moves into new markets may result in companies such as DSM, Novozymes, and DuPont Danisco becoming competitors.

Syngenta reported a 2% rise in group sales, to $8.4 billion, in the first half. Underlying integrated sales were 7% higher, with volumes up 4% and prices up 3%. Net income was 5% lower, at $1.4 billion, because of higher production costs for seeds and one-off factors. Net income in the year-earlier period was boosted by a one-off royalty payment from DuPont. Earnings per share (EPS) fell 7%, but underlying EPS was 9% higher. Syngenta is on track to deliver full-year sales growth in line with its 2020 target, which is based on sales growing at an 8% CAGR and market share increasing by half a percentage point annually, Mack says. The target will be achieved through global offers tailored to local needs, new business models and collaborations, and continued margin expansion, he adds. The company targets an Ebitda margin of 22–24% in 2015, Mack says.

Analysts have responded enthusiastically to the new Syngenta business model. “Syngenta is seeing a positive reaction from its customer base to its new integrated offer,” says Sophie Jourdier, equity research analyst/agriculture with Liberum Capital (London). “Farmers are focused on improving crop yields, and this can be done effectively through an integrated seed and chemical offering. I believe the integrated offer will be especially successful in developing regions where farmers are very receptive to improved farming practices.”

Syngenta’s integrated business is structured into 19 territories grouped under four geographic areas: EAME, North America, Latin America, and Asia/Pacific. The company is developing an expanded, crop-based product pipeline and increasing its reach into new markets with new products, solutions, and local go-to-market strategies. Syngenta’s 2020 sales targets for the eight strategic crops are $5.5 billion for corn, $4.0 billion for specialty crops, $3.5 billion for soybean, $3.0 billion for vegetables, $2.8 billion for cereals, $2.2 billion for DFC, and $2.0 billion each for rice and sugarcane (chart). These figures compare with 2012 sales of $3.6 billion for corn, $2.1 billion for specialty crops, $2.3 billion for soybean, $1.7 billion for vegetables, $1.6 billion for cereals, $1.3 billion for DFC, $590 million for rice, and $259 million for sugarcane.

The targets are realistic, analysts say. “Syngenta’s $25-billion sales target implies a CAGR of 8%/year. This is the level of growth Syngenta has achieved historically. In this light, I think the target is achievable,” Jourdier says. “We are not yet discounting this level of growth in our forecasts but I believe it is an achievable ambition.”

Syngenta is a leader in GM seeds and in biotech R&D in seeds and crop protection. However, in certain parts of the world, notably the European Union, the use of most genetically modified seed varieties has not been permitted by regulatory authorities, and public opinion is against plant biotechnology being introduced in the foreseeable future. Major crop protection players, including Syngenta, as well as BASF and Monsanto, have, as a result, virtually abandoned efforts to seek regulatory approvals for biotech products in Europe.

Another challenge facing Syngenta is the recently announced moratorium on the use of neonicotinoid insecticides in the European Union. The European Commission, following a vote by EU member states, said that it would proceed with a plan to restrict, for two years from 1 December, the use of three neonicotinoids on a variety of crops, including sunflowers, corn, and canola, on the grounds that the products may be harmful to honeybees. The three compounds are clothianidin and imidacloprid, each produced by Bayer CropScience, and Syngenta’s thiametoxam. The commission will review the evidence as soon as new scientific information is available, or within two years, and decide whether to continue or revoke the restrictions.

Syngenta says that $75 million of its revenue is at risk because of the EU ban, but that this amount will be partly compensated by sales of alternative products. “The proposal is based on poor science and ignores a wealth of evidence from the field that these pesticides do not damage the health of bees,” Atkin says.

A wider ban may be in the cards, however. Beekeepers in the United States are lobbying EPA against full registration of Dow’s sulfoxaflor, a fourth-generation neonicotinoid. Mack says he is confident that EPA will act on the basis of scientific evidence rather than the precautionary principle to which Europe adheres.

Analysts also are not convinced that neonicotinoids should be banned. “There is no scientific evidence as far as I am aware to suggest that neonicotinoid use in agriculture is to blame for the collapse in bee colonies,” Jourdier says. “Indeed, there is evidence to the contrary. In Australia, for example, neonicotinoids are used widely, but there have been no reports of declines in the health of bees. There is evidence to suggest that the cause of the colony collapse is the varroa mite.”

Research and innovation will play a key role in Syngenta achieving its growth targets. The company spent almost $1.2 billion on R&D in 2012, equivalent to 9% of its crop protection and seeds sales and 5% more than in the year before. CFO John Ramsay expects Syngenta’s R&D expenditure to remain 9–10% of sales.

The company says that it takes 6–10 years to bring a new crop protection product, plant variety, or trait to the market from discovery to initial launch. The average cost is $300 million for a crop protection product and $175–200 million for a biotech trait, it says.

Syngenta has reorganized its R&D function following the decision to integrate the commercial operations of crop protection and seeds. The R&D function continues to develop crop protection and seeds products while enabling the development of crop-focused solutions that integrate Syngenta’s technologies. “R&D focuses on taking a more holistic approach to help customers grow their specific crops using the best technology to address their needs,” Syngenta says.

Technology is crucial to the success of Syngenta’s integrated offer. New technology in crop protection achieved a CAGR of 44% between 2007 and 2012, and new product sales were up 36% last year. The newest crop protection products include the cereal herbicide Axial, sales of which are growing worldwide; the seed-care treatment Avicta; and the broad-spectrum insecticide Durivo. The next-generation fungicide isopyrazam, branded as Seguris, was approved in the European Union last November, and the new seed-care product sedaxane, branded Vibrance, was launched in North America and Australasia.

Syngenta plans to build on the potential of Vibrance with the launch of Clariva for soybeans in the United States. Clariva is a breakthrough seed-treatment nematicide that came to Syngenta with the acquisition of Pasteuria. Syngenta says the product addresses the challenge of soybean cyst nematodes, which cause $1.5 billion in annual losses for US growers alone. Other recent launches include Solatenol, a broad-spectrum succinate dehydrogenase inhibitor fungicide primarily for soybean rust. “Solatenol will be very important in Brazil,” Atkin says. Peak sales of Durivo, Seguris, Vibrance, and Solatenol should exceed $1.2 billion/year, Syngenta says. The company’s biggest-selling product remains Amistar, a strobilurin azoxystrobin fungicide, revenue from which exceeded $1.2 billion last year.

Analysts say Syngenta has a rich pipeline that includes some very innovative offerings. “One of these is Plene. This could be a $1-billion product and is a breakthrough approach to sugarcane planting, which lowers planting costs by 15%. In its first year of launch, Syngenta received orders of $350 million from sugar mills,” Jourdier says.

Syngenta has adjusted its Plene introduction program, however. “We had to do two things: make it more broadly available because the demand is very strong and make it in a reliable way with a good shelf life,” Atkin says. The program is taking a little longer than expected, he says.

Corn: Offer helps combat glyphosate-resistant weeds.

Syngenta targets quadrupling sales to rice growers, from $500 million to $2 billion, by 2020. Two-thirds of this growth is targeted to come from the GrowMore program. This program involves selling to farmers basic protocols with the necessary, higher-quality seeds and crop chemicals. The combination of better ingredients and better education in farming practices typically boosts yields by 30%, Jourdier says.

Syngenta, to realize its ambitions, must also expand production capacity worldwide. Ramsay expects capital expenditure (capex) this year to total $700–750 million, “of which a significant part relates to the expansion of seed production,” he says. Capex totaled $508 million in 2012.

Mack is confident that Syngenta will continue growing in line with its targets. “Our sales performance this year is set to be in line with the targeted compound average growth rate of 8% to 2020,” he says. “Over the next seven years, we will grow across each of our eight key crops through global offers tailored to local needs. We will enter into new business models and collaborations in order to expand the available market, and, while keeping our eyes firmly on reaching $25 billion in sales by 2020, we will be equally attentive to expanding margins.”

Analysts say that the strong performance of Syngenta’s share price reflects the success of the company’s strategies. “Syngenta shares have outperformed the broader equity market by about 400% over the last 10 years,” Jourdier says. “The company has achieved this through its delivery of high single-digit revenue growth, growing profitability, and strong cash generation. If it can continue in this trend, as it aims to, it will be a very good achievement.”